Welcome Guest [Log In] [Register]
Welcome to Livonianeighbors.com. We hope you enjoy your visit.


You're currently viewing our forum as a guest. This means you are limited to certain areas of the board and there are some features you can't use. If you join our community, you'll be able to access member-only sections, and use many member-only features such as customizing your profile, sending personal messages, and voting in polls. Registration is simple, fast, and completely free. To ensure your privacy, never use personal information in your screen name or email address ("janedoe@hotmail.com" or "Billysmom" for example).

Join our community!


If you're already a member please log in to your account to access all of our features:

Username:   Password:
Add Reply
Developer's Investments protected; It'$ who you know and who'$ in your pocket
Topic Started: Apr 2 2012, 04:02 PM (762 Views)
Mrs.M
Veteran
Retroactive state law lets GOP chairman's brother off hook for $2.4 million
March 31, 2012 |
104 Comments

(photo)
Michigan Republican Party Chairman Bobby Schostak.

By Paul Egan

Detroit Free Press Lansing Bureau

(photo)
David Schostak of Schostak Brothers & Company, a partner in Kern Woodward Associates, talk to reporters about the Campus Martius development plan announced by Detroit Mayor Dennis Archer Wednesday morning. May 21, 1998 / DETROIT FREE PRESS


LANSING -- Wells Fargo bank will file a court challenge to a new state law signed by Gov. Rick Snyder that overturned a $2.4-million judgment against the brother and business partner of Michigan Republican Party Chairman Bobby Schostak, the bank's attorney said Friday.
The law Snyder signed Thursday, which says a lender can recover only the real estate offered as collateral when a certain type of commercial loan goes into default, is unusual because it is retroactive, to the benefit of Schostak's brother.
It sailed through the Legislature with bipartisan support but left some unhappy lawmakers in its wake.
"It was one of the more disturbing bills that we've taken up this session," said Rep. Tom McMillin, R-Rochester Hills, who chairs the House Oversight, Reform and Ethics Committee.
The law is intended to overturn a judgment related to an unpaid loan on a Traverse City mall that was controlled by the Livonia-based real estate firm Schostak Bros. That judgment was upheld by the Michigan Court of Appeals.
The new law also could impact at least one other case recently decided on similar grounds in federal court in Michigan, though attorneys and legal scholars say the new state law may violate the U.S. Constitution.
"We fully expect to challenge the constitutionality of this law on a number of grounds," said Troy attorney James Allen of Miller Canfield, who represents Wells Fargo, the bank that says it is owed the money.
McMillin said he is disturbed that the new laws alters existing contracts and by the rush to get it approved. He said his initial concerns were elevated when he began investigating and discovered the Schostak connection and what he felt were inflated claims by backers of the bill.
"We were originally told ... the sky is falling," McMillin said. "But it didn't appear there was going to be a calamity."
The bill was supported by nearly all the big players in Michigan's commercial real estate industry, who warned of a huge blow to the market if the judgment against Schostak Bros. co-CEO David Schostak and a Schostak-controlled company, Cherryland Mall LP, was allowed to stand.
Supporters included Gary Torgow, a big Democratic Party donor and the founder and president of Sterling Group, a major real estate investment and management firm.
A Grand Traverse County judge ruled that David Schostak, who had guaranteed a commercial loan for the mall that went into foreclosure, was personally liable for the amount owed.
Michael Berger, president of Berger Realty in Southfield, said such a result was never intended or anticipated by the lender or the borrower and the ruling could put Michigan developers personally on the hook for billions of dollars more in similar nonrecourse loans.
"It very well may put many of them out of business and into bankruptcy, further crippling Michigan's economic recovery," Berger testified on behalf of the industry in front of a legislative committee.
Here's how the situation that the bill was written to address arose:
David Schostak, who, along with Bobby and Mark, is one of the three Schostak brothers referenced in the company's name, guaranteed an $8.7-million commercial loan in 2002 for Cherryland Mall, a shopping center the firm invested in and managed.
That loan was pooled and sold along with other loans in an investment known as a commercial mortgage-backed security. Wells Fargo was trustee for the pooled loans.
Cherryland Mall LP, the Schostak entity that owned the mall, stopped making full mortgage payments in August 2009, leading to foreclosure by the bank in 2010.
The loan was nonrecourse, which generally means the lender gets higher interest rates, but in a default, it can go after only the real estate collateral -- not the assets of the guarantor.
There are exceptions, typically involving what are known as "bad-boy acts" where, for example, the guarantor engages in fraud. But liability is often limited to specific, related losses, not the entire debt.
But Wells Fargo found another exception. Cherryland had to remain a "single-purpose entity," according to the language in the loan documents. To meet that requirement, it had to remain solvent, according to the language in the mortgage, Wells Fargo successfully argued.
In December, a three-judge panel of the Michigan Court of Appeals upheld the decision against Schostak, ruling the contracts had plain meaning: "Cherryland was required to remain solvent, and it failed to do so. That failure ... triggered the full recourse provision of the mortgage."
The panel, which received briefs supporting the Schostak position from Attorney General Bill Schuette, the Michigan Chamber of Commerce and others, waved off what it described as warnings of economic disaster for the business community.
"It is not the job of this court to save litigants from their bad bargains or their failure to read and understand the terms of a contract," the panel said.
Attorneys for Schostak Bros. filed an appeal with the Michigan Supreme Court while also seeking the legislative solution.
Lawrence McLaughlin, chairman of the real estate department at Detroit's Honigman law firm and a longtime Schostak Bros. attorney who worked on some of the Cherryland transactions, confirmed Thursday that he helped draft the law. McLaughlin also testified in favor of the bill at a committee hearing as counsel to an industry coalition, the Building Owners and Managers Association.
"Is Schostak's a beneficiary? Sure they are," McLaughlin said. "Did we do it for Schostak? No, we did it as an industry effort."
The Schostaks kept a low profile, and the firm's name was conspicuous in its absence on a list of 13 companies and their principals that signed a statement in support of the bill.
Bernard Financial Group President Dennis Bernard, who responded to a phone message left for David Schostak, said Schostak stayed away from the legislative effort "because of who his brother is."
Bobby Schostak, the state GOP chairman, said he never lobbied for the bill.
"I stayed away from it," he said, adding he believes his brother David intentionally took the same approach.
The legislation passed 32-5 in the Senate and 97-12 in the House. Main sponsor Sen. Arlan Meekhof, R-Olive Township, pointed to bipartisan support.
On the Democratic side, both Senate Minority Leader Gretchen Whitmer, D-East Lansing, and Sen. Tupac Hunter, D-Detroit, were listed as sponsors of Meekhof's bill. But both asked that their names be removed as sponsors shortly before voting "yes," records show.
"They took their names off the bill once they discovered the reason why it suddenly became a priority for the Republicans," said Senate Democratic spokesman Bob McCann. "They still believe that the policy of the legislation was sound."
Snyder told the Free Press on Wednesday, "I haven't seen the bill on my desk yet" and that he would study it when it arrived. He signed it the next morning, saying in a news release it "encourages continued business investment in Michigan by ensuring clarity in certain types of commercial loans."
How much vulnerability for Michigan's commercial real estate industry results from the ruling remains in dispute, since not all similar loans are in trouble and not all include terms identical to the Cherryland loan.
Deutsche Bank said in a March 12 newsletter to investors that the value of Michigan loans with similar terms is at least $1 billion. Bernard, a lender who was the broker on the Cherryland loan and testified at trial in support of the Schostak position, said there is $13 billion worth of commercial mortgage-backed securities in Michigan and the value of loans that could be impacted by the ruling is likely closer to $3 billion.
Allen, the Wells Fargo attorney, described industry estimates as "hyperbole ... unsubstantiated by the record" because of wide variation in detailed terms of such loans.
Some lawmakers who support the intent of the law oppose its retroactive sweep, which extends to contracts that have been ruled on by courts as long as the final appeal in the case hasn't been exhausted.
"This bill contains a retroactive clause," state Rep. Dave Agema, R-Grandville, said in the House on March 20 explaining his "no" vote. "It should not. Good lawyers write contracts. It should not be the job of the Legislature to interpret them."
John Pattow, a law professor at the University of Michigan who specializes in commercial law, said he expects a challenge under the contract clause of the U.S. Constitution.
"There are all kinds of cases out there that say you can't tell a court how to come out in a certain case and you can't rewrite contracts that are written already," Pattow said.
Contact Paul Egan: 517-372-8660 or pegan@freepress.com
More Details: Snowball effect?
Commercial developers say a Michigan Court of Appeals decision could hurt the industry by putting developers personally on the hook for loans totaling more than $1 billion. The judges said they were simply enforcing a contract based on its plain wording. So far, three Michigan cases have been similarly argued:
• Wells Fargo Bank v. Cherryland Mall LP: The appeals court in December upheld a $2.4-million judgment against David Schostak of Schostak Bros. related to a shopping mall foreclosure in Traverse City.
• 51382 Gratiot Holdings v. Chesterfield Development: U.S. District Judge Robert Cleland, also in December, issued a $12.2-million judgment against John Damico in connection with a loan default for a shopping center in Chesterfield Township.
• 5417 Bay Road Holdings v. Landmark Plaza Associates: In January, attorney James Allen of Miller Canfield, who represents the creditors in all three cases, asked U.S. District Judge Thomas Ludington for a $1.9-million judgment against Jay Furman and Walter Samuels in connection with a Saginaw property that missed payments after the loss of a major tenant, Sam's Club. Allen cited the above two cases. The judge has yet to rule.
http://www.freep.com/article/20120331/NEWS15/203310415


Brian Dickerson: In Lansing, a mortgage bill tailored for one
April 1, 2012 |
14 Comments

Brian Dickerson
•Commentary and criticism
•Brian Dickerson
In 2009, when real estate developer David Schostak realized that a mall he and some partners owned near Traverse City was worth a good deal less than the $8.7 million they'd borrowed to purchase it, he did what a lot of less affluent Michiganders have done upon finding themselves upside-down on a mortgage:
He stopped making payments.
And two years later, when the Michigan Court of Appeals ruled that Schostak's loan agreement made him personally liable for the $2.1-million difference between the value of the foreclosed property and the outstanding loan balance, Schostak did what you and I might do in the face of such a judgment -- assuming that one of our brothers was the chairman of the state Republican Party, and that our family's real estate company had contributed generously to that party's elected officeholders:
He enlisted his friends in the GOP Legislature, who quickly adopted a bill excusing him from the terms of the problematic mortgage.
OK -- so possibly your own brother is NOT the chairman of a major political party. And perhaps, like me, you tend to contribute less money to politicians than you spend on, say, Snickers bars.
Still, our elected officials in Lansing represent all of us, right? And if you or I needed help wriggling out of an inconvenient mortgage contract, the same lawmakers who delivered for Schostak would be there for us, too -- right?
A different standard
To confirm this, I called Senate Majority Leader Randy Richardville, R-Monroe, who cosponsored the legislation that retroactively relieved Schostak of his obligations to Wells Fargo Bank.
I figured Richardville would be sympathetic when I explained that a clause in my own home mortgage agreement seemed to suggest that I, too, could be held personally liable for the full amount of the loan -- even if my house was worth less than the unpaid principal.
"I want to make sure my stamp collection is safe if I decide to stop making my mortgage payment," I explained. "Would you be willing to sponsor a bill rescinding the provision that gives the bank the right to go after my personal assets?"
"I'm afraid I can't do that," Richardville replied evenly.
Why not? I demanded. If my situation didn't merit immediate remedial action by legislators, why had Schostak's?

In Schostak's case, Richardville said, legislators had acted to resolve "legal confusion" that might discourage others from investing in Michigan real estate."There was some uncertainty, it seemed like, in the court system," he explained.
But that's not how a unanimous state Court of Appeals panel saw the case in which Wells Fargo, which serviced the $8.7 million loan, sued Schostak for $2.1 million lenders were still owed after foreclosing on his Grand Traverse County property.
Although commercial mortgage contracts like Schostak's are typically designed to protect borrowers' personal assets, the judges said, the agreement Schostak had signed unambiguously put him on the hook for any "deficiency" if his property became insolvent.
"It is not the job of this court to save litigants from bad bargains or their failure to read and understand the terms of a contract," appellate judges said in a ruling, published last Dec. 27, upholding a lower court judgment in favor of Wells Fargo.
Legislators to the rescue
Richardville said he and his colleagues mobilized after receiving a letter -- signed by a bipartisan group of real estate heavyweights including Robert Taubman, Andrew Farbman, Dennis Gershenson and Gary Torgow -- warning that the state's commercial real estate market would suffer if potential investors believed their personal assets were at risk whenever one of their real estate projects went belly-up.
Senate Minority Leader Gretchen Whitmer, D-Lansing, who initially agreed to cosponsor the bill with Richardville, said she also was persuaded the ruling against Schostak represented a threat to Michigan business. (Torgow, the president and founder of the Sterling Group, is one of the state's most important Democratic donors.)
But although she persuaded most of her Democratic colleagues to support the bill, Whitmer said she took her name off it after concluding that GOP lawmakers had been "less interested in looking forward to clarify the law than in looking backward to help one of their own."
Richardville and Whitmer both said they were disturbed to learn that many real estate lawyers I'd spoken to suggested that Schostak's peers had exaggerated any long-term threat to the industry.
Richardville confided he'd heard similar criticism from another policy expert and intended to follow up. "I think there's still time to talk to the governor," he told me Friday.
"But senator, he signed it yesterday," I pointed out.
"Well," Richardville chuckled, "I guess I'm a little slow."
Contact Brian Dickerson: 313-222-6584 or bdickerson@freepress.com
http://www.freep.com/article/20120401/COL04/204010479/Brian-Dickerson-In-Lansing-a-mortgage-bill-tailored-for-one
I'd agree with you, but then we'd both be WRONG.
Offline Profile Quote Post Goto Top
 
Otis B.
Veteran
Jack sure has some shady pals.
Offline Profile Quote Post Goto Top
 
steve emsley
Member
[ *  * ]
I, for one, am shocked. ;)
Offline Profile Quote Post Goto Top
 
DADDYOH10
Member Avatar
Veteran
I, am not! This is typical for Republicans, our mayor and his associates, and the Michigan legislature....who voted for these guys and why? It is just plain scary!
Offline Profile Quote Post Goto Top
 
Otis B.
Veteran
It has nothing to do with Republicans and everything to do with Wayne County machine politics.
Offline Profile Quote Post Goto Top
 
Mrs.M
Veteran
If I may, this debacle is not limited to Wayne County or Political Party controlled. There have been other articles regarding the passing of this retroactive bill. There was a Dem who also has been sheltered 'rescued' because of it.

It has to do with the developers and the politicians who have received their (the developers'/builders') generous contributions financial and otherwise.

It's been a I'll scratch your back mentality for years.

Remember these real estate and builders have various names to their businesses. Also, often their spouses, siblings or adult offspring make considerable donations to the politician, in order to sidestep the supposed limits by one individual.

Morality, honesty, integrity are NOT characteristics found among many.

There are websites available to see who donates to whom and how much.

I'd agree with you, but then we'd both be WRONG.
Offline Profile Quote Post Goto Top
 
DADDYOH10
Member Avatar
Veteran
O.K. It could be... the cr_p goes all over when it hits the fan, but the spectrum of what has been happening as of recent is in our state, local, and U.S. houses of government. I may have voted for Ficano in the past but "fool me once...."

I stand ready to look for smart, honest politicians to vote for. Naive yes. There probably are not any left or running.
Offline Profile Quote Post Goto Top
 
« Previous Topic · Livonia Neighbors Forum · Next Topic »
Add Reply